Bernanke Backlash May Boost Japan's Opposition to Debt Buys

By Mayumi Otsuma -
Nov 9, 2010

The backlash against Federal Reserve
Chairman Ben S. Bernanke’s plans to buy an additional $600
billion of U.S. Treasuries may stiffen the Bank of Japan’s
resolve against more aggressive monetary easing steps.

Governor Masaaki Shirakawa signaled last week that large-
scale stimulus like the Fed’s isn’t in the offing, saying that
if needed the bank would expand an existing 5 trillion yen ($62
billion) asset-buying fund. Since then, China has said the Fed’s
measure will fuel inflation and German Finance Minister Wolfgang Schaeuble called the U.S. plan “clueless.”

“This will support the Bank of Japan’s case for holding
off from easing monetary policy,” said Takuji Aida, a senior
Japan economist at UBS AG in Tokyo. “If the yen strengthens the
BOJ will probably be forced to ease, but this will let it take
its time.”

Any move by the BOJ to emulate the Fed’s quantitative
easing might deepen global concern that emerging economies will
be flooded by cash from advanced countries, leading to bubbles.
Should the yen add to its 15 percent climb against the dollar so
far this year, hurting exports and worsening deflation, any BOJ
policy response is likely to remain smaller than the Fed’s move,
according to Sumitomo Mitsui Asset & Management.

Countering Strong Yen

“It’s fully possible that the BOJ will expand monetary
stimulus to counter the yen, as the basic trend of the
currency’s advance hasn’t changed much,” said Hiroaki Muto, a
senior economist at Sumitomo Mitsui in Tokyo. “The bank will
increase the asset-buying fund as its next policy action. Given
that such an expansion will still be dwarfed by the scale of
Fed’s easing, however, criticism that the BOJ isn’t doing enough
will linger.”

The yen has climbed 1.9 percent against the dollar since
the BOJ cut the overnight call rate to between zero and 0.1
percent on Oct. 5 and also unveiled the 5 trillion yen fund to
buy government and corporate debt, real estate investment trusts
and exchange-traded funds. It was trading at 81.69 to the dollar
at 9:48 a.m. in Tokyo.

Deflation continues in Japan, with consumer prices
excluding fresh food falling for the 19th straight month in
September. BOJ board members are forecasting inflation below the
1 percent increase they consider as stable in the three years
through March 2013.

BOJ’s Quantitative Easing

Lessons learned when they conducted quantitative easing
themselves may be behind BOJ officials’ lack of enthusiasm about
resuming the policy, Aida said.

Between 2001 and 2006 the central bank sought to ease
monetary conditions by injecting cash into bank reserves, at its
peak targeting 35 trillion yen in reserves.

The funds that the BOJ pumped in during that era inflated
asset prices in other markets, as traders borrowed yen cheaply
to buy overseas assets, in a process known as a yen-carry trade,
Aida said. “That experience has also made the central bank
cautious about aggressive easing,” he said.

Shirakawa said that monetary stimulus in large economies
can have a “big” effect outside of their borders.

“I’m aware that monetary easing in advanced economies has
a big impact on emerging economies as well as on financial
markets, including commodity markets,” Shirakawa said at a news
conference on Nov. 5 following a policy board meeting.

Risk of Bubbles

His remarks may suggest the BOJ will refrain from loosening
credit too much, said economist Mari Iwashita.

“Governor Shirakawa probably mentioned the risks of excess
liquidity bubbles as a warning aimed at the BOJ itself as well
as other central banks, signaling that going on an easing spree
should be avoided,” said Iwashita, chief market economist at
Nikko Cordial Securities in Tokyo.

Chinese Vice Finance Minister Zhu Guangyao said this week
that the Fed move might “shock” emerging markets by flooding
them with capital.

“Around the world we have $10 trillion of hot money
flowing around, more than the $9 trillion in hot money at the
beginning of the global financial crisis,” Zhu said. The U.S.
“has not fully taken into consideration the shock of excessive
capital flows to the financial stability of emerging markets.”

Year-End Slowdown

Japan’s central bank, for its part, might need to consider
further easing in January or February, said Nikko Cordial’s
Iwashita. That’s when economic figures will likely show a
slowdown in the fourth quarter stemming from weaker global
demand, damage to exports and output from the strong yen and the
waning of government stimulus measures, she said.

The BOJ may increase its asset buys to 20 trillion yen from
5 trillion yen by the end of next year if the economy slumps,
the government issues more bonds and the U.S. eases further,
wrote Tokyo-based Goldman Sachs Group Inc. economists Chiwoong
Lee and Yuriko Tanaka in a report.

“However, we do not expect much impact on the real
economy,” the two wrote. “BOJ Governor Shirakawa himself has
acknowledged that copious fund supply and extensive easing have
failed to boost funding demand, but the BOJ nevertheless feels
it has to give heed to what it can do.”